Tuesday is turning out to be a great day to be a tech investor. Earlier this morning, three big upgrades came out of Wall Street. First, Mizuho Securities upgraded AMD (NASDAQ:AMD) to buy, then Goldman Sachs followed with upgrades of Western Digital (NASDAQ:WDC) to neutral -- and in the day's biggest move, upgraded NVIDIA (NASDAQ:NVDA) stock to conviction buy.
According to the analysts, AMD stock has the potential to rise 14% in value (new price target: $13). Western Digital, on the other hand, up 52% already since Goldman mistakenly put it on its sell list back in August, has probably peaked already (Goldman says it's worth only $68 a share). The strongest prospects of all, however, can be found at NVIDIA -- where Goldman believes the stock could shoot up a further 22% to a target price of $129 per share.
Here are three things you need to know.
1. "A unique growth story"
Let's begin with the day's biggest news. StreetInsider.com reports this morning that Goldman Sachs has added NVIDIA to its "conviction buy list," citing the company's ability to benefit from "positive secular trends in gaming, VR (virtual reality), AI (artificial intelligence)/ML (machine learning) and automotive." According to data from S&P Global Market Intelligence, most analysts who follow the stock think NVIDIA will grow its earnings about 10% annually over the next five years -- but Goldman sees a whole lot more in store.
In particular, Goldman sees revenue from NVIDIA's data center business (i.e., storage) nearly doubling in fiscal 2018, and growing 53% again in fiscal 2019. (Here it's important to remember that NVIDIA operates on an accelerated financial calendar. Right now, we're in the middle of fiscal Q4 2017, so when Goldman talks about fiscal 2018, it really means next year -- 2017.) Gaming revenue, too, will be above-trend, with Goldman predicting 20% sales growth there next year, followed by 28% one year after.
Clearly, Goldman is expecting NVIDIA to grow a whole lot faster than anyone else out there, and the analyst predicts that "estimate revisions [will] serve as a positive catalyst for the stock in the coming quarters" as other analysts begin to realize that they were wrong, and Goldman Sachs was right. (Modesty has never been one of Goldman's defining virtues.)
2. Oops. Did Goldman say sell? They meant buy...
That's actually kind of curious, given that at the same time as Goldman is loudly proclaiming its faith in NVIDIA stock, it's also fessing up to a pretty massive miss in its predictions for Western Digital. As Goldman admits, four months ago it told investors to sell Western Digital because the company was spending too much on capex, and building capacity to serve a NAND market that would be in critical "oversupply" by 2017.
Now however, Goldman says it was off base on that prediction. "NAND prices for SSDs and retail may be up 5-10% qoq in 1Q17," says Goldman. In addition, a weak Japanese yen is likely to add close to 4% to Western Digital's gross margin this coming year. All this has led to a 52% spike in Western Digital's stock price since Goldman panned it.
Late to the party, Goldman is upgrading Western Digital -- but only to neutral, as the analyst expects to be proven right...eventually.
3. Don't forget about AMD
Meanwhile, elsewhere on Wall Street, analysts have been warming up to AMD stock for some weeks now. This morning, Mizuho Securities joined the club with an endorsement for AMD stock, agreeing that it sees potential in the company's ProGFx, Ryzen and Zen chips for applications in deep learning (DL) and artificial intelligence (AI).
Mizuho sees these markets powering AMD's gross margin in years to come. In fact, it sees gross margin potentially doubling from "~30%" to perhaps 60% as early as Q2 2017. Applying these margins to as much as $1 billion in incremental revenue from DL, the analyst believes AMD could earn as much as $0.30 in extra operating profit next year.
Bonus thing: Profits
Granted, even if this prediction comes true, Mizuho still doesn't see AMD turning profitable next year, but only losing $0.05 per share instead of $0.06 per share. But looking out to 2018, the analyst believes AMD could be solidly profitable, and earning as much as $0.14 per share across its several businesses.
If true, that would be great news for AMD investors -- profits at last, after five straight years (and soon to be six) of losing money. On the other hand, even $0.14 per share in profits would result in about a 93 P/E ratio on the stock -- which both seems a mite high, and won't materialize for two more years at the earliest.
Going back through our list in reverse order, Western Digital is also currently unprofitable, and likely to end 2016 with a loss. But next year, analysts are forecasting $2.02 per share in earnings, valuing the stock at about 35 times forward earnings based on today's $70 share price. Given analyst expectations for 10% long-term earnings growth, this also seems expensive.
And finally, in true "first shall be last" fashion, we come to NVIDIA. Goldman Sachs has very high hopes for this one, as we've seen. Investors should note, however, that the consensus among analysts is still for NVIDIA to earn no more than $2.44 per share next year. At the stock's current price of $105 and change, that works out to a forward P/E ratio of 43. Much as I like NVIDIA as a business, the stock still looks too rich for my blood.
Honestly, Wall Street may love all these stocks -- but I wouldn't touch any one of them.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he currently ranks No. 346 out of more than 75,000 rated members.
The Motley Fool owns shares of and recommends NVIDIA, and also owns shares of Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.